Calculating Gross Profit for Bonus Act: A Step-by-Step Guide

Disclaimer: This content is provided for informational purposes only and does not intend to substitute financial, educational, health, nutritional, medical, legal, etc advice provided by a professional.

What You Must Know About The Payment of Bonus Act?

Paying bonus as an employer in India first happened during the First World War. In certain cases of industrial disputes demand for payment of bonus was also included. In 1950, the Full Bench of the Labour Appellate evolved a formula for determination of bonus. A plea was made to raise that formula in 1959.

What is Allocable Surplus?

Allocable surplus refers to the amount left after deducting specified expenses and prior charges from the available surplus. It is the basis for calculating the bonus payable to employees under the Payment of Bonus Act.

Stepwise Guide Computation of Allocable Surplus

Calculating the allocable surplus involves several steps. Let's break it down:

  1. Calculate Gross Profit as per Second Schedule
  2. Calculate Depreciation Under Section 6
  3. Calculate Development Rebate or Development Allowance Section 6
  4. Calculate Direct Taxes payable by Employer
  5. Calculate sum as specified under the third schedule to the Act

Step 1 - Calculate Gross Profit as per Second Schedule

The first step in determining the allocable surplus is to calculate the gross profit as per the Second Schedule of the Payment of Bonus Act. The Second Schedule provides a detailed formula for calculating the gross profit based on the financial statements of the employer.

Step 2 - Calculate Depreciation Under Section 6

After calculating the gross profit, the next step is to determine the depreciation under Section 6 of the Act. Depreciation is the reduction in the value of an asset over time due to wear and tear, obsolescence, or other factors. The Act specifies the method for calculating depreciation.

Step 3 - Calculate Development Rebate or Development Allowance Section 6

In addition to depreciation, the Act also allows for the calculation of development rebate or development allowance under Section 6. These are deductions that can be claimed by the employer for investments made in certain specified assets. The Act provides the method for calculating the development rebate or development allowance.

Step 4 - Calculate Direct Taxes payable by Employer

The next step is to calculate the direct taxes payable by the employer. This includes income tax and any other taxes that are directly levied on the employer's income. The Act provides guidelines for calculating the amount of direct taxes.

Step 5 - Calculate sum as specified under the third schedule to the Act

Finally, the allocable surplus is calculated by summing up the amounts calculated in the previous steps as specified under the third schedule to the Act. The third schedule provides the formula for determining the allocable surplus based on the gross profit, depreciation, development rebate or development allowance, and direct taxes.

Key Takeaways

  • Calculating the allocable surplus is crucial for determining the bonus payable to employees under the Payment of Bonus Act.
  • The allocable surplus is the amount left after deducting specified expenses and prior charges from the available surplus.
  • The formula for calculating the allocable surplus involves several steps, including calculating gross profit, depreciation, development rebate or development allowance, and direct taxes.
  • The Payment of Bonus Act provides detailed guidelines for calculating each component of the allocable surplus.

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Disclaimer: This content is provided for informational purposes only and does not intend to substitute financial, educational, health, nutritional, medical, legal, etc advice provided by a professional.